Shocked that companies and mutual funds would invest OPM (Other People's Money) in high-risk investments, the Shocked Investor was originally on a mission to find out if our money ended up in these dubious instruments. This blog now also discusses other financial topics, such as straddles, options, gold, natural gas, agri/food stocks, and the collapse of the US Dollar.

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Thursday, November 18, 2010

This editorial of the FT is quite shocking for those who thought that the financial crisis was over. Europe should prepare now for a run on the banks.

"Its fumbling approach to the explosive instability of the Irish banking system leaves little hope that the other ticking bombs with which Europe’s economies are riddled are going to be disarmed in time".

"Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds.

[...]

"So Ireland – and Europe – must confront the prospect of an inevitable string of bank restructurings. Giving away more capital now will weaken states’ ability to deal with the problem when there is no more time to be bought.

Preparations must now be made for dealing with a run on banks by depositors or wholesale lenders. Countries that have yet to put in place special insolvency regimes – Ireland included – must do so without delay. They must allow states swiftly to take control of banks so as to keep operations going during a panic and quickly allocate losses by forcibly restructuring wholesale debt or converting it into equity.
[...]
Ireland has little time to lose. Overall deposits are shrinking. Europe must prepare for a run on the Irish banks spreading, with deposits fleeing not to financial institutions with solid assets but to those with solid sovereigns: Berlin may soon face calls for support.

It concludes:

"This game of bail-outs on the sly cannot be sustained for much longer"